Understanding and Planning for the “Jock Tax”

Oct 3, 2023

Professional tennis players may have to pay taxes not only in different countries, but even in different parts of the same country.

Planning for the Jock Tax


Please note that Morgan Stanley does not provide tax advice. Clients should consult their own tax advisors with respect to any of the strategies discussed in this audiocast. All tax views and tax opinions expressed in today's audiocast are those of EisnerAmper and not Morgan Stanley.         


Hello everyone, my name is Elly Christoff and I head up the Tax Services team here at Morgan Stanley. Today we want to provide those of you listening with some insights around what's known as the jock tax. While the name implies that this is an important topic for professional athletes who travel all over the country for work, the concepts we'll discuss today are actually applicable to individuals who earn income in multiple states.

I'm excited to be joined by Sandra Richards, Managing Director and head of Global Sports and Entertainment at Morgan Stanley, and Jim Jacaruso, Director within EisnerAmper's Athletes and Entertainment tax practice. Welcome to you both.


Sandra Richards: Thank you for having us here, Elly.


Jim Jacaruso: Thanks Elly, happy to be here with both of you.


Elly Christoff: So I'm really looking forward to a great and impactful conversation here. And I'd love to begin by giving our listeners a little background on the Sports and Entertainment division here at Morgan Stanley. So Sandra, would you mind telling us a little about your group and their focus?


Sandra Richards: Absolutely Elly. To provide, like a baseline of our Global Sports and Entertainment business here at Morgan Stanley, it was created specifically to service the unique, complex, and sophisticated needs of the professional athlete and entertainer client segment.

Which has since expanded beyond the traditional high net worth talent in the space to include influencers, industry executives, and even within the past year with the change collegiate athletes benefiting substantially from the ability to monetize their name, image, and likeness.

From a wealth management perspective, clients in this space need to and excel from working with a financial advisor who they can trust, and who understand the industry and their unique needs, and who understands how finances are a powerful tool to build generational wealth, broadening education and yielding empowerment.

Our division's financial advisors are carefully selected for the Global Sports and Entertainment Director designation, known as GSE, because of their advanced experience, successful track record, and qualifications. They craft creative financial strategies that account for the unique challenges, and the dynamics of our clients' goals, dreams, lifestyles, as their careers grow and evolve over the years. And I will say the jock tax is something that's very important for athletes and entertainers to consider in terms of what it is, why it applies to them, and how it can affect their finances.


Elly Christoff: Luckily we have just the right tax expert here with us today. So Jim, why don't you start with some context around the jock tax and really where it all stems from.


Jim Jacaruso: Great idea, Elly. I'll start with a quote from the legendary coach John Wooden, who used to preach, "Failing to prepare is preparing to fail." Coach Wooden had a common sense approach to basketball and life that athletes should follow, especially when tax planning.

Although states have been targeting athletes for decades, the so-called jock tax picked up steam in 1991 when California issued tax bills to Michael Jordan and his teammates, who were playing for the Chicago Bulls, on income earned while performing in the state of California for the NBA Finals against the L.A. Lakers.

In other words, California levied a tax on players who lived out of state for income they earned while visiting and conducting business there in California. Illinois quickly instituted its own tax on visiting players when teams played in the state imposing tax on Illinois athletes. Many states and municipalities quickly followed suit.


Elly Christoff: So yes, we all learn from each other and really the state tax authorities are certainly no exception here. And what you are describing does not apply just to professional athletes, correct? I mean, even common folks like us here online should be paying attention.


Jim Jacaruso: Correct. All these issues apply to employees who perform services in multiple states, including states other than their tax home. Athletes are easy targets for taxing jurisdictions because their salaries and schedules are public knowledge and easy to track. But the tax is levied on any visiting individual conducting business in a state or city. So technically this tax applies to team employees that travel with the team and any non-athlete that travels and conducts business on the road.


Elly Christoff: Absolutely, very important. Thanks for clarifying that point, Jim. Now, Sandra, in your experience are clients generally well-informed about the jock tax?


Sandra Richards: Well Elly, I think more athletes over the years have become aware of the jock tax. But what our team has gathered from working directly with professionals affected by it is that there is undoubtedly more room for education. Candidly, all the things that individuals can tend to gloss over the concept until they start to see their paychecks.

That's when the wake up call happens, when the money is being deducted from their bottom line. So I'll share a story with you that comes to mind. There's a prominent NFL player who will remain nameless who once shared that when he was a rookie he began looking at his paycheck deductions and other income statements more closely, and noticed that something didn't add up to his listed salary.

So he marched into the team controller's office to inquire, and they essentially explained the jock tax to him. The team was playing games each week in various states with different income tax treatment, which resulted in tax withholdings against the players', coaches', and team employees' checks.

And mind you, NFL regular season back then was 16 games, now 17, minus playoff games. So ever since then he said it totally changed his approach to money. And the jock tax is very much at the forefront of several of his personal and financial considerations, a la free agency negotiations, his team schedule, and other pertinent things.

I thought it was funny when he shared that he got excited to see his team's first few games prior to the following season were in states with no income tax. Just picture a budding NFL star in his early 20s who cannot wait for the NFL to reveal their schedule not just to see the match-ups, but also to figure out where he collects the most money based on his income tax treatment.                              

Needless to say, this young man was elated when his team, and therefore his home games, were in a state with no income tax. But in all seriousness, this is why our team looks to equip young athletes and entertainers in their communities with financial literacy and education as early as possible. Because they can plan to potentially minimize whether or partly offset the tax impact on their earnings with proper mitigation strategies put into place during planning conversations with trusted experts and advisors.


Elly Christoff: What a great story, Sandra, and certainly an insightful athlete. I absolutely agree, educating our clients is so critical here. Now, Jim, when having the tax planning conversations with a client, such as the one that Sandra just mentioned, what are the most important things to consider?


Jim Jacaruso: Well, the first thing I always emphasize to athletes is that it's not how much they make but how much they keep. This discussion focuses on their spending habits, since what they keep is what they do not spend. The second most important thing is where they reside now, their domicile, where they should consider residing during their career, which state they will live when their athletic careers are over, and understanding the impacts their residency decision will have on how much they keep.

To understand the impact of state taxes, athletes must understand the difference between the domicile and the statutory resident designation. In general, one domicile is their primary residence, where their heart is, where they keep things near and dear to them, and where they return when away temporarily. An athlete's tax home is where the team plays its home games.


Elly Christoff: Thank you, Jim. That was really helpful. Understanding and determining the right state for your domicile is a key part of understanding the impact of the jock tax on your income. So, you know, Jim, what should one consider when thinking about a domicile for tax purposes?


Jim Jacaruso: Elly, that's a great question. States will generally look to five primary factors to determine taxpayers' domicile. The first factor is their home. If an athlete only owns one home, domicile is generally easy to establish. Establishing a domicile is more difficult when an athlete owns multiple homes, especially when they own a property in their tax home, which, as a reminder, is where their team plays its home games.

The burden to prove where one establishes a domicile is the responsibility of the athlete. The second factor is the athlete's time. Since an athlete may be away from their domicile for an entire season, where he or she spends their time before and after the season can be a critical factor.

Thirdly, states look at active business involvement. Again, if an athlete will spend most of their season in their tax home, this may not be a major factor unless the athlete engages in business in their tax home before and/or after the season.

The fourth factor is personal items. This is commonly known as the teddy bear test, and ultimately asks which resident does the athlete keep his or her sentimental items? Finally, the fifth factor is family. Where does the athlete's immediate family, usually meant to include his wife and minor children, reside? The children's school location is an important decision of where to live and is often linked to the quality of schools.


Sandra Richards: And Jim, I'll call out that teddy bear test and the location of family and schools here. As you mentioned earlier, one's domicile is their permanent residence, where their heart is, where they keep the things near and dear to them, and where they return when they're away temporarily.

Sometimes there's an emotional connection to one's domicile, right? Perhaps it makes more sense by the dollar for an athlete to make their primary residence in a state where there's zero income tax. But maybe they were born and raised in a particular place, or there are better living conditions for them and their family in a given region. Those factors are also important. Whatever the case may be, well-informed planning and decision making takes into account both life circumstances and tax efficiency.


Elly Christoff: Absolutely Sandra. And to help inform that balance between life and tax planning considerations, Jim, can you talk a bit about how a professional's determined domicile translates to tax treatment in different states?


Jim Jacaruso: Well, it is advantageous for an athlete to live in a state that does not impose an income tax. Currently nine states do not have an individual income tax on salaries and wages, including Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Also the District of Columbia does not impose tax on non-residents. Many states use the duty days method, which allocates income based on the ratio of duty days an athlete is present in the state to the total number of contractual duty days. Duty days are counted from the first day a player is contractually obligated to report to pre-season training and ends on the last day of the season.

For most, their season ends on the last day in the regular season. And for some, the day their team is either eliminated from the post-season or wins the league championship. For example, a Major League Baseball player who was a Florida resident with either the Miami Marlins or the Tampa Bay Rays will spend fewer duty days in states that impose an income tax, which will result in less tax.

Conversely, the highest paid players in any of the five California baseball teams will spend almost half their duty days in California and be subject to the highest state tax in the country, 13.3%, which includes the 1% mental health services tax. Similarly, New York-based athletes will pay a 10.9% state tax rate.


Elly Christoff: And what a huge difference depending on where one declares their domicile, and even where a team plays its home games. You know, state income taxes really can vary drastically.


Jim Jacaruso: Yes, Elly, they sure can. For example, when a certain Major League Baseballer chose to leave the New York Yankees to sign a $240 million, ten-year contract with the Seattle Mariners. Almost 50% of his income was not subject to state tax, since the state of Washington has no income tax. If he had signed the same contract with the New York Yankees, he would've paid 8.82% on almost 50% of his salary.


Sandra Richards: That's quite a difference. Jim, I have a follow up question there. Are there additional factors to keep in mind for athletes who choose to live in a state with income tax versus no income tax?


Jim Jacaruso: Yes, Sandra, there are many factors. Athletes that live in a state that impose an income tax generally will not pay double tax on their income if they receive a credit for taxes paid to other states against their resident income tax. This will vary by state.

For those players that live in a no income tax state but maintain a permanent place of abode where they play their home games and spend at least 183 days in their tax home, there is a statutory resident trap. Like residents in a tax states, statutory residents are taxed on all income, including portfolio income and other income such as appearance fees earned in other states.

Even if they receive a credit for taxes paid to other states, portfolio income is not to a state and will be double taxed. Statutory residents may also be subject to an onerous city tax that may not be claimed as a credit against their resident state income tax. New York City's top rate is almost 4%, and that can sting.


Elly Christoff: Absolutely. Thanks for that, Jim. Are there any additional thoughts on tax planning for athletes and entertainers that you'd like to leave us with?


Jim Jacaruso: Sure. I would like to emphasize the importance of tax planning considerations when entering a contract overall. One must consider the state tax impact on signing and performance bonuses, which are treated differently for state income tax purposes.

Service contracts, licensing, and sporting goods companies, due diligence should also be taken with scheduling appearances and attending autograph shows, for both the athletes at the top of their sport and those that do not make big money, tax planning is no longer an off-season checklist item.

They need a tax advisor that is well-versed in income allocation, statutory residency issues, and understands the resident state tax credit rules to minimize the tax hit. By choosing the right tax professional, the athlete will have a trusted advisor that can work with their agent and financial advisor to minimize state taxes.


Elly Christoff: That's a great point there, Jim. A partnership between the financial advisor, the tax advisor, and the client is absolutely crucial. So speaking of partnership, Sandra, from your side can you leave us with some insight on how your division serves the sports and entertainment community?


Sandra Richards: Certainly. So Morgan Stanley Global Sports and Entertainment was named an official institutional financial advisor participant of the NFL Players Association, the NFLPA, in 2020. The program offers qualified global sports and entertainment directors as the advisors of choice for current and former NFL players and agents, which is a relationship we continue to strengthen and have served to be mutually beneficial.

And, of course, we produce educational content that is relevant to our clients' complex needs. For a tax example, we partnered with the Sports Lawyers Association on a webinar that covered the impact of taxes on athletes and sports professionals and how integrating taxes into your investment process can help improve after tax returns and grow your wealth.

I encourage our listeners to visit our Global Sports and Entertainment page at MorganStanley.com/GSE, where we regularly post timely content like this on topics that are relevant to our sports and entertainment community.

But overall, when working with a GSE-designated financial advisor at Morgan Stanley, clients receive first class service from an expert who intimately understands the sports and entertainment space. Our GSE Directors serve as trusted financial quarterbacks with access to both the full power of the firm's suite of solutions, as well as an extended network of professional advisors such as agents, attorneys, and tax advisors like Jim here, that they may bring to the table for a client as needed, and make holistic wealth planning as seamless as possible.


Elly Christoff: That's such great information. And with that I'd love to thank both you, Sandra, and Jim for providing a ton of insights for our listeners today. This was really helpful. To our listeners, if you are interested in having a more in depth tax planning conversation, please speak with your Morgan Stanley financial advisor who can connect you to leading U.S.-based third party tax service providers, including Jim at EisnerAmper.

For those of you in the sports and entertainment industry who may be looking for a financial advisor of your own, you can visit MorganStanley.com/GSE and search for a GSE director by state. Thank you all for listening in and attending, and I hope you have a great day.

Professional tennis players can have challenging tax situations when they play and earn money in different countries. However, in some countries, players may even need to pay taxes in different regions or states. In the United States, for example, players may need to pay state taxes as well as federal taxes, depending on where they earn their money. In this podcast, three experts explain how to prepare.



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